With only slim prospects for a recovery in Brazilian deals,
bankers are reluctant to forecast a big rise in volumes and
investment banking fees. "We expect to see deal flow from
Brazil in the second half of the year," says Katia Bouazza,
head of capital financing for Latin America at HSBC. "Investors
would like to see an increase in the overall level of stability
and confidence in Brazil. I expect this will be achieved
gradually."

The
Brazilian sovereign has been absent from international debt
markets since late 2014.
Petrobras, a repeat issuer in the past, has also stayed
away and has found it hard to access local funding too.
Confusion over corporate exposure to the Lavo Jato corruption
investigation and dollar-related financing (among other things)
have caused the Brazilian risk premium to spike to levels that
have kept other quasi-sovereign and corporates from accessing
the market. The combination of a fall of GDP in 2015 of between
3.5% and 4%, a lot of debt pre-funding in 2014 and a soaring
dollar meant there was little appetite for fresh international
debt.

Dealogic says investment banking revenues from Brazilian
DCM activity stood at just $70 million year-to-date at the
beginning of December 2015, versus $250 million for the full
year 2014 and down from $313 million in 2012.

Vladimir Werning, head of economic research and sovereign
debt strategy in Latin America at JPMorgan, expects a repeat of
2014 in the year ahead. Only $27 billion of debt will need to
be financed from the region in 2016, he says.

"Companies in the region aggressively pre-financed and
pushed out maturities in recent years," says Werning. "Although
in a rising rate environment we could see increasing levels or
liability management at discount [in 2016] and we are seeing
companies looking at taking out debt where bonds are trading at
a discount in the secondary. We have seen quite a few
transactions announced in the financial space and we expect
that trend to continue."

Hope

Argentina offers some hope. "Companies are starting to plan
their capex for the future and we are in various discussions
that are at different stages for different types of companies,
but the comeback of Argentina is a 2016 event," says Bouazza.
"There has been a shift of appetite from the investor base and
that will have an impact for financing activities, whether
that’s debt, equity or M&A."

If the timing and size of deal flow from Argentina remains
uncertain, Mexico looks set to be the region’s
leading market again this year. For the first time in more than
a decade, Mexico generated the highest DCM and ECM fees for
investment banks, with a 41% share and 71% share of total Latin
American fees respectively. At the beginning of December,
Mexican equity fees had reached $100 million, while
Brazil’s were just $15.6 million and set to break
the previous year’s record post-crisis annual low
of $22.6 million. Investment banking revenues from Brazilian
equity issuances have collapsed since 2012’s $225
million total.

Pedro Martins, head of Latin America equity research and
chief equity strategist at JPMorgan, says the outlook remains
low, for a region that has historically raised around $25
billion to $30 billion a year.

"The last two years have been slow given the less favourable
valuation environment for LatAm and so issuers are not looking
at prices (for their shares at levels) they deem important,"
says Martins. "As you look forward, macro-economic conditions
for the region remain challenging yet Mexico and
Argentina look like bright spots. There are pretty decent
capex pipelines to be completed in Mexico with regards to the
reforms that might require [equity] to support that."

The poor economic climate in the region might drive some
issuance, says Martins. "The other thematic that might pop up
[in 2016] is what we call re-equitization," he says. "If you
look at US infrastructure companies in 2008 and 2009 there was
a lot of issuance related to getting those
companies’ debt-to-equity ratios back into
equilibrium and I think in Latin America there are some sectors
and companies that are looking to optimize their capital
structures and some of those may welcome some more equity."
JPMorgan has done some bottom-up analysis of potential targets
for such deals but Martins declined to share names.

M&A in Brazil remains quite strong, with Brazil
continuing to generate more than 60% of the
region’s fees (although nominal value fell to $214
million YTD in December when compared to $338 million in 2014).
The devaluation of the real has led to dollar valuations
becoming interesting for international acquirers. Also, some
bankers fear that this year Brazilian companies may struggle to
adapt to replacing low-cost TLJP (long term interest rate)
funding (7%) as BNDES looks to shrink its corporate lending
portfolio. With corporate lending rates over 20% there could be
a spike in corporates seeking to sell or merge this year
– with a potential area of activity for the banks.

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